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Can we get income tax deduction of Bed debts and provision for doubtful debts?
Under the Income Tax Act, 1961, bad debts and provisions for doubtful debts are treated differently for deduction purposes. The law allows actual bad debts as a deduction under certain conditions, while provisions for doubtful debts are generally not deductible. 1. Deduction for Bad Debts [Section 3Read more
Under the Income Tax Act, 1961, bad debts and provisions for doubtful debts are treated differently for deduction purposes. The law allows actual bad debts as a deduction under certain conditions, while provisions for doubtful debts are generally not deductible.
1. Deduction for Bad Debts [Section 36(1)(vii)]
A bad debt is a debt that has become irrecoverable and is written off from the books of accounts. The following conditions must be satisfied for claiming a deduction:
✅ The debt must have been included as income in earlier years.
✅ The debt must be related to the business or profession carried on by the taxpayer.
✅ The debt should be actually written off in the books of accounts in the year in which the deduction is claimed.
🔹 Important: Writing off the debt in the books of accounts is mandatory—mere provision for bad debts will not be allowed as a deduction.
2. Deduction for Provision for Doubtful Debts [Section 36(1)(viia)]
Normally, a provision for doubtful debts (i.e., expected bad debts that may occur in the future) is not deductible. However, an exception exists for banks, financial institutions, and NBFCs:
Scheduled Banks & Cooperative Banks: Deduction up to 8.5% of total income (before deductions) and 10% of rural advances.
NBFCs: Deduction up to 5% of total income on provisions for doubtful debts.
3. When Bad Debt Recovery is Taxable [Section 41(4)]
If a bad debt, which was earlier allowed as a deduction, is subsequently recovered, it must be offered as income in the year of recovery.
4. Key Judicial Decisions & Practical Considerations
The Supreme Court (T.R.F. Ltd. case) has ruled that if a bad debt is written off in the books, the deduction cannot be denied merely because the assessee failed to prove irrecoverability.
Businesses should document communication with the debtor (reminders, legal notices) to substantiate the claim in case of scrutiny.
Conclusion
Bad debts actually written off in the books are allowed as a deduction.
Provision for doubtful debts is generally not allowed, except for certain financial institutions.
Recovered bad debts must be offered as income in the year of recovery.
For businesses, maintaining proper records and ensuring compliance with Section 36(1)(vii) & (viia) is crucial for claiming these deductions.
See lessIs income tax deduction of marked to market loss is allowed?
Marked-to-market (MTM) losses arise when businesses or traders adjust the value of their assets, liabilities, or financial instruments to reflect fair market value at the end of the financial year. The Income Tax Act, 1961 has specific provisions regarding the deductibility of such losses. 1. ApplicRead more
Marked-to-market (MTM) losses arise when businesses or traders adjust the value of their assets, liabilities, or financial instruments to reflect fair market value at the end of the financial year. The Income Tax Act, 1961 has specific provisions regarding the deductibility of such losses.
1. Applicability of MTM Loss Deduction
MTM losses are generally allowed as a deduction only if they satisfy the following conditions:
The loss is realized or recognized as per accounting standards.
It is a revenue loss and not a capital loss.
The loss is computed following the Income Computation and Disclosure Standards (ICDS) prescribed under the Act.
2. Disallowance Under Section 40A(3) and Section 37(1)
If the MTM loss is notional (i.e., an unrealized loss), it may be disallowed under Section 37(1), as it is not an expense incurred for business.
Losses resulting from non-business transactions or capital assets (such as revaluation of land or investments) are not allowed.
3. ICDS and MTM Loss Deduction
ICDS – I mandates that expected losses should be recognized only if permitted under the Act.
ICDS – VI (Foreign Exchange Gains/Losses) allows MTM losses on monetary items but not on capital account transactions.
ICDS – VIII (Securities) permits deduction of MTM losses only for securities held as stock-in-trade.
4. Loss on Derivative Contracts
Section 43(5) considers derivative trading in recognized stock exchanges as a non-speculative business, allowing deduction for MTM losses.
However, speculative MTM losses in unregulated derivatives may not be deductible.
5. Judicial Precedents
Several courts have allowed MTM losses if they are business expenses, such as for banks, financial institutions, or traders. However, notional losses due to mere valuation adjustments are typically not allowed as deductions.
Conclusion
The deductibility of MTM losses depends on their nature, compliance with ICDS, and whether they are realized or unrealized. To claim deductions, businesses should ensure proper accounting treatment and classify the losses as business expenses rather than capital losses.
See lessWhen the deduction of advertisement is not not allowed under income tax act?
Under the Income Tax Act, 1961, advertisement expenses are typically allowed as a deduction under Section 37(1) if they are incurred wholly and exclusively for business or profession. However, certain circumstances lead to their disallowance: 1. Advertisement for Political Purposes Expenses incurredRead more
Under the Income Tax Act, 1961, advertisement expenses are typically allowed as a deduction under Section 37(1) if they are incurred wholly and exclusively for business or profession. However, certain circumstances lead to their disallowance:
1. Advertisement for Political Purposes
Expenses incurred on advertisements directly supporting political parties or political causes are not allowed as deductions. However, contributions to political parties through Electoral Bonds or donations under Section 80GGC may be eligible for tax benefits.
2. Advertisements Resulting in Capital Expenditure
If the advertisement expense creates a long-term brand value, such as launch campaigns, logo redesigns, or promotional hoardings with permanent benefits, it may be classified as a capital expense and not deductible as a business expense. However, depreciation under Section 32 may be available if treated as an intangible asset.
3. Expenses That Are Prohibited by Law
Any expenditure incurred for an illegal purpose, violating regulations, or encouraging unlawful activities is not deductible. This includes advertisements promoting banned products, misleading claims, or violations of ethical advertising standards.
4. Personal Advertisement Expenses
If the expense is related to personal promotion rather than business (e.g., congratulatory advertisements for individuals, non-business sponsorships), it is not deductible. Only business-related advertising expenses qualify.
5. Non-Compliance with TDS Requirements
If an advertisement payment exceeds the prescribed limit and TDS is not deducted as per Section 194C, the expense can be disallowed under Section 40(a)(ia). Ensuring proper TDS compliance is essential to avoid disallowance.
6. Excessive or Unreasonable Advertisement Expenses
If the expense is disproportionate to the business scale or unreasonably high, the Assessing Officer may invoke Section 40A(2) to disallow the excessive portion.
Conclusion
See lessTo ensure the deductibility of advertisement expenses, businesses should maintain proper records, ensure compliance with tax laws, and justify the necessity of expenses for business purposes. Keeping track of TDS deductions, ensuring expenses are revenue in nature, and aligning with business requirements can help prevent tax disallowances.
What is capital assets as per income tax act, whether stock in trade is considered as capital assets?
nder the Income Tax Act, 1961, a “capital asset” is broadly defined in Section 2(14). It includes property of any kind held by an assessee, whether or not connected with their business or profession. However, this definition comes with several exclusions. Key Exclusion: Stock-in-Trade Stock-in-TradeRead more
nder the Income Tax Act, 1961, a “capital asset” is broadly defined in Section 2(14). It includes property of any kind held by an assessee, whether or not connected with their business or profession. However, this definition comes with several exclusions.
Key Exclusion: Stock-in-Trade
Stock-in-Trade Is Not a Capital Asset:
Items held for the purpose of sale in the ordinary course of business—such as inventory, raw materials, or finished goods—are classified as stock-in-trade and do not fall under the definition of capital assets.
Why This Matters:
Capital gains on the sale of capital assets are taxed differently from business income. Since stock-in-trade is part of normal business inventory, any profit from its sale is treated as business income, not as capital gains.
In Summary
Defined under Section 2(14) of the Income Tax Act and includes property held for investment or personal use.
Stock-in-trade is excluded from the definition of capital assets because it is part of the inventory used in the normal course of business.
This distinction is crucial for determining the applicable tax treatment on the sale of assets. For capital assets, capital gains tax rules apply, while profits from stock-in-trade are taxed as business income.
See lessWhat is the tax liability on sale of Agricultural Land in rural area as per income tax act?
Under the Income Tax Act, 1961, agricultural income is exempt from tax if it is derived from land used for agricultural purposes in a rural area. This means that if you sell agricultural land that qualifies as rural, any capital gains from the sale are generally not taxable. Key Points to Consider ERead more
Under the Income Tax Act, 1961, agricultural income is exempt from tax if it is derived from land used for agricultural purposes in a rural area. This means that if you sell agricultural land that qualifies as rural, any capital gains from the sale are generally not taxable.
Key Points to Consider
Exemption Basis:
The exemption is provided under Section 10(1) of the Income Tax Act. If the agricultural land meets the criteria (used for agriculture and situated in a rural area), the gains on its sale are not included in taxable income.
Definition of Rural Agricultural Land:
To qualify as rural, the land should be located outside the jurisdiction of a municipality or a cantonment board. Proper land use and title documents are necessary to confirm its status.
Documentation:
Keep all relevant documents, such as land records and usage certificates, to support the claim that the property is agricultural land in a rural area.
Conclusion
If your agricultural land qualifies as rural under the criteria set out in Section 10(1) of the Income Tax Act, any capital gains on its sale will be tax-exempt. This benefit is aimed at supporting the agricultural sector and rural development.
See lessWhat is the difference between short term capital assets and long term capital assets?
Capital assets are classified as short-term or long-term based on their holding period. The taxation rules for both categories differ under the Income Tax Act, 1961. 1️⃣ Short-Term Capital Assets (STCA) ✔️ Assets held for ≤ 36 months (≤ 3 years) before transfer.✔️ For listed shares, equity mutual fuRead more
Capital assets are classified as short-term or long-term based on their holding period. The taxation rules for both categories differ under the Income Tax Act, 1961.
1️⃣ Short-Term Capital Assets (STCA)
✔️ Assets held for ≤ 36 months (≤ 3 years) before transfer.
✔️ For listed shares, equity mutual funds, and certain securities – holding period ≤ 12 months is considered short-term.
✔️ Gains taxed as per slab rates (for individuals) or flat 15% (for equities under Section 111A).
✔️ No indexation benefit available.
2️⃣ Long-Term Capital Assets (LTCA)
✔️ Assets held for > 36 months (or > 12 months for equities & specified assets).
✔️ Taxed at 20% with indexation (except equities, which are taxed at 10% without indexation if gains exceed ₹1 lakh under Section 112A).
✔️ Eligible for exemptions under Sections 54, 54F, 54EC, etc.
🚨 Key Budget 2024 Updates Considered
📌 Debt Mutual Funds – Always taxed as short-term, no LTCG benefit.
See less📌 Market-Linked Debentures (MLDs) – Always short-term, regardless of holding period.
📌 REITs & InvITs – Capital repayment now taxable.
Whether transfer of capital assets by subsidiary company to its Indian holding company is taxable as capital gain under income tax act?
Under the Income Tax Act, 1961, the transfer of capital assets between a wholly-owned subsidiary and its Indian holding company may be exempt from capital gains tax, provided certain conditions are met. Exemption Under Section 47(v) As per Section 47(v) of the Act, such a transfer is not treated asRead more
Under the Income Tax Act, 1961, the transfer of capital assets between a wholly-owned subsidiary and its Indian holding company may be exempt from capital gains tax, provided certain conditions are met.
Exemption Under Section 47(v)
As per Section 47(v) of the Act, such a transfer is not treated as a taxable transfer if:
If both conditions are fulfilled, no capital gains tax will be levied on the transaction.
Key Considerations
This provision facilitates internal corporate restructuring within a group without attracting tax liabilities, ensuring smooth business operations.
See less